Market Update - The Long and Winding Road to Recovery A look at hardwood pallet demand east of the Rockies

By Jeff McBee Date Posted: 9/6/2011December of 2010 finished out the year solidly for the pallet industry. It was no surprise that activity didn’t measure up to traditional standards, but year-over numbers were very encouraging.

Activity levels began this year in very encouraging fashion. Demand levels were uneven, but almost everyone started the year in surprisingly solid form.

There were some companies that were logging record months for their company. Overall, demand was as solid as we had seen since the economy turned southward back in June of 2008.

The upturn and encouraging demand went that way for the entire first quarter of 2011. There was one caveat in all of the encouraging trends. There was no long term confidence.

Pallet suppliers were happy with the sometimes strong demand, but were kept on a short leash by their customers. When asked if the economy was finally turning the corner, the pallet suppliers reporting the strong activity would give what amounted to basically the same answer. “I don’t know what I will be doing after two weeks, but business is good until then.”

The reason pallet suppliers were giving this answer was that was what they were getting from their customers who were providing the encouraging demand levels.

Everyone – both pallet suppliers and their customer base – was enjoying the improvements, but no one had any long term confidence in the market. The first quarter turned out to be as solid as the industry had seen in well over two years. Yet, you couldn’t find anyone who was convinced that the economy was truly turning.

After a solid first quarter, gasoline prices started to climb. Suddenly, everyone feared a repeat of the summer of 2008. That fear validated the overall lack of confidence in the economy.

Pallet demand reacted in predictable fashion. Demand levels crashed. Once everyone realized that gas prices weren’t about to crush the economy, activity began to trend in the right direction by early May. Then June began by continuing to build on that improvement. By mid-June however, the debt ceiling debate had reached a fevered pitch. Suddenly, pallet demand crashed again.

As soon as the government settled its differences with a resolution to the debt ceiling issue, the results were visible in the pallet market. Pent-up demand from the previous six weeks hit the market and provided a modest spike in pallet demand.

It has become increasingly evident that the general public at all levels has very little confidence in the government. It can be easily debated that the current administration’s efforts to kick-start the economy have backfired badly.

There is also strong evidence that the slow improvements in the economy and jobs market couldn’t have performed any worse without intervention. Add to the malaise the piling up of debt and it is easy to see why the public has little to no faith in the government to fix anything.

As of press time, a new Rasmussen poll revealed that a mere 17 per cent of Americans “believe that the U.S. government has the consent of the governed.” The number represents an all time low.

The approval rating for Congress is also sitting at an all-time record low of 6 per cent. This miserable approval rating was coupled with news that 46 per cent of Americans believe that most members of Congress are corrupt.

One of the largest challenges in today’s market is out of the hands of the pallet supplier. The government isn’t giving businessmen and women anything to feel that it can turn around the economic mess.

The first step would be for the government to give people something they can rely on. That hasn’t happened since the economic downturn.

There is an alarming lack of leadership on Capitol Hill. The lack of direction in what could now be called “The Great Recession” doesn’t instill any reliability where businesses are willing to take any sort of risk. We see it throughout the pallet industry.

Pallet suppliers – new and used – have operated at lesser levels by running lean for three years now. When any increase in activity comes along, the last thing the typical pallet supplier is looking to do is take on additional employees. The typical response is to run some overtime with limited staff.

The pallet industry is built upon derived demand. When customers have product to ship, they need pallets. That is a two edged sword. When activity slows, it can bring brutally competitive pallet prices to the market as some companies seek to fill plant capacity to cover overhead. The lower pallet prices don’t generate additional pallet demand; they merely divert business from one company to another.

So the pallet industry continues into the fourth year of a recessionary economy. I have frequently mentioned to phone contacts that if anyone had tried to convince me in early 2008, that the forest products industry was about to go through the mess we’ve been through thus far and that most everyone would survive, I would have thought they had bumped their head. It seems almost impossible, but it is the way it has played out.

The pallet industry has always been a lean industry. This recession has taught us that we can be even leaner. It hasn’t been pretty, but we will come out on the other side equipped to prosper like never before.

And it will apparently be no thanks to the current government.

Next time – The Long and Winding Road to Recovery (Part 2) Are we frail?

(Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call 800-805-0263 and ask for Jeff.)

con•fi•dence

noun \ [kon - fi - duh ns]

a : a feeling or consciousness of one’s powers or of reliance on one’s circumstances <had perfect confidence in her ability to succeed> <met the risk with brash confidence> b : faith or belief that one will act in a right, proper, or effective way <have confidence in a leader>

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